Please provide really good explanations.

QUESTION 11

[Q11-Q13] HP and Dell are companies in the exact same business. They both used to have the same capital structure with a debt-to-equity ratio of 1/19. Recently, however, Dell hired many investment bankers and consultants at great expense, and decided to change its debt-to-equity ratio to 1/5. HP figures that they will copy Dell, and move their debt-to-equity ratio to 1/5 as well.

HP doesnt want to pay for the bankers and consultants that Dell used. Thus, HP relies on you to help them understand the transition.

Assume the following: HP used to have a cost of equity of 20%. Assume that regardless of its capital structure, HPs cost of debt is 3%. The change in D/E is expected to be permanent. Further, HPs tax rate is 30%.

[Step 1: de-levering] Find the cost of unlevered equity for HP.

	A.	16.35%
	B.	19.00%
	C.	19.15%
	D.	22.38%